What is ETF?

What is ETF?

Exchange-Traded Fund or ETF is an investment fund that is traded on the stock exchange. The securities held under an ETF are commodities, stocks, and bonds. These are traded for The securities held under an ETF are commodities, stocks, and bonds. These are traded for an amount close to the original total asset value of the asset, during the trading day. A bond index or stock index is tracked by most of the ETFs. The price of the ETF can change throughout the day. Usually, ETFs have much lower fees and higher daily liquidity compared to mutual fund shares. ETF can be used for purposes like Hedging, Equitizing Cash, and for Arbitrage. ETF shareholders get a small portion of the gained profits, i.e, the dividends paid and interest earned. They may also get a remaining value if there is a liquidation of the fund. ETF shares are mainly traded on public stock exchanges, so these types of shares can be transferred, bought, or sold easily like the shares of stock. ETF supply occurs through creation and redemption processes that involve some special investors, also referred to as authorized participants (APs). APs are mainly renowned financial institutions like banks and investment firms that have a great deal of buying power.

The key benefits of ETFs are discussed in the following:

  • Investors can sell short or purchase on margin. They can also buy one share, as there is no minimum investment required.
  • The commission that is paid to the broker while purchasing or selling ETFs is the same as that paid for regular orders.
  • It is comparable to a mutual fund that can be purchased and sold at a cost that changes throughout the day. The transactions are executed in real-time as well.

A mutual fund is a financial vehicle that is made up of a pool of money collected from various investors to invest in securities like stocks, bonds, money market instruments, and other types of assets. Mutual funds are controlled by experts, who allocate the fund's assets and attempt to gain capital or income for the fund's investors. A mutual fund's portfolio is manufactured and maintained to match the investment objectives stated in its prospectus.
Mutual funds give each investor access to professionally manage portfolios of equities, bonds, and other securities. Therefore, each shareholder participates proportionally in the profit or losses of the fund. Mutual funds invest in a large number of assets, and performance is usually tracked as the change in the net market cap of the fund which is derived by the aggregating performance of the underlying investments.

SR No Mutual Funds Exchange Traded Fund (ETF)
  • 1
  • Mutual Funds are traded at the closing total asset value.
  • Exchange-Traded Funds are traded during the course of a trading daytime and its value changes during this time.
  • 2
  • Mutual Funds have changing operating expenses.
  • ETFs operating expenses are lower.
  • 3
  • Most Mutual Funds have a specific minimum expense.
  • In case of ETF there is no minimum investment specified.
  • 4
  • Mutual Funds generally have more tax liabilities than ETFs.
  • ETFs offer tax benefits to the investors due to how it created and redeemed
  • 5
  • Mutual Fund shares can only be bought directly from the funds at the NAV price that is constant during the trading day.
  • ETF can be purchased and sold anytime on the stock exchange, at the prevailing market price.
  • 6
  • Usually, compared to ETFs, the transaction costs are zero when mutual fund shares are purchased or sold.
  • There is an additional cost included while trading ETFs, which is known as the bid-ask spread.
  • 7
  • Mutual Funds have lower liquidity compared to ETFs.
  • ETF has much higher liquidity as it is not connected to its daily trading volume. ETF liquidity is connected to the liquidity of the stocks included in the index.
  • 8
  • Some mutual funds charged a penalty on selling the share early. Generally, the time limit imposed on selling a share is 90 days from the date of buying.
  • ETFs do not have any kind of time limit on selling an asset. The investor can purchase or sell at any point of the trading day at the price available during the time. So there is no minimum holding time period specified for the same.
  • 9
  • Mutual Funds are index-tracking but are actively managed by professionals. Assets are picked in a kind of way that beats the index and achieves higher performance.
  • Exchange-Traded Funds track a proper index. For example, it tries to match the price movements and returns indicated in an index by making a portfolio that is similar to the index constituents.
  • Diversified structure: Both these fund consist of a basket of securities bought by money that is pooled together from each investor.
  • Professional management: ETFs and mutual funds are overseen by expert managers or management companies. Both mutual funds and ETFs can be actively or passively managed, although a larger proportion of ETFs is passively managed to track an index.
  • Variety of choice: ETFs and mutual funds both give a chance to investors to access a variety of asset types, including stocks, bonds, commodities, cash-equivalent securities, or some combination of these.

If you're interested in making a diversified investment portfolio, both these options can give you an excellent manner. However, as mentioned earlier, depending on the time period, risk appetite, and financial goals, you can decide which one is better. For some investors, liquid investments were given more priority over long-term investments. While the nature of both these funds is quite similar and they offer a diversified investment portfolio, a healthy and wise mix of ETFs and mutual funds can give benefits to your investment record. However, before you make any action, understand the functionality behind both these funds, assess the market risks you're willing to take, and consult with a professional if you want to make sure you're making the right investment call for yourself. Invest more but invest wisely!

ETFs and mutual funds have so many similarities but have some differences as well. ETFs usually carry a lower fee and can trade intraday like stocks. While the diversified kind nature of both mutual funds and ETFs can make them appealing to less risk-tolerant investors, but they still carry market risks that investors should consider know before investing. Have more questions regarding the functioning of stock exchange, feel free to reach out to us by clicking here.